2025 (8) TMI 349 - AT - Income Tax

CSR Expenses Not Deductible Under Section 37(1), But Section 80G Deductions Allowed If Properly Adjusted

The ITAT Hyderabad held that CSR expenditure is not allowable as a business expense under section 37(1) of the Act. However, if the assessee does not ... CSR expenditure - disallowance of CSR expenditure u/s 37(1) and denial of deduction u/s 80G - HELD THAT:- As we look into the provisions of Explanation-2 to section 37(1) of the Act, which says that any expenditure relatable to the discharge of CSR, is not a business expenditure and cannot be allowed as such. If the assessee does not claim any deduction of such amount spent as CSR under any of the provisions between 30 and 36 of the Act, and suo-moto disallowed the same by adding it back to the P&L account, and it is only thereafter the business income of the assessee computed in accordance with the principles laid down for computation of the profits and gains of business or profession in sections 28 to 44DB of the Act, then the donations covered under section 80G of the Act cannot be denied and on compliance with Explanation-2 of section 37 of the Act, the Revenue shall not have any grievance. Whether or not the assessee suo moto disallowed the spend towards the CSR while computing the business income is a verifiable fact. Thus, we direct AO to verify whether the assessee does not claim any deduction of the amount spent as CSR under any of the provisions between 30 and 36 of the Act and suo moto disallow the same by adding it back to the P&L account, and it is only thereafter the business income of the assessee computed in accordance with the principles laid down for computation of the profits and gains of business or profession in sections 28 to 44DB of the Act, and if finds it to be so, then delete the disallowance of the donations covered under section 80G of the Act. Appeal of the assessee is allowed on the above terms. ISSUES: Whether expenses incurred as mandatory Corporate Social Responsibility (CSR) expenditure under section 135 of the Companies Act, 2013, qualify for deduction under section 80G of the Income Tax Act, 1961.Whether the essential prerequisite of voluntariness for a donation under section 80G is absent in CSR expenditure mandated by law.Whether the proviso in section 80G excluding certain CSR-related donations (e.g., to Swachh Bharat Kosh and Clean Ganga Fund) implies that other CSR donations are eligible for deduction.Whether Explanation 2 to section 37(1) of the Income Tax Act mandates disallowance of CSR expenditure as business expenditure and its impact on deduction under section 80G.Whether the Assessing Officer's disallowance of CSR expenditure under section 37(1) and denial of deduction under section 80G is justified.Whether the Commissioner of Income Tax's revision under section 263 of the Income Tax Act was legally sustainable in revising the Assessing Officer's order allowing deduction under section 80G for CSR expenditure. RULINGS / HOLDINGS: The Court held that the deduction under section 80G of the Act must be made 'in accordance with and subject to the provisions of this section,' and that the 'essential prerequisite element of donation, namely, the voluntariness,' is absent in mandatory CSR expenditure under section 135 of the Companies Act, thus disallowing such CSR expenses as deduction under section 80G.However, the Court recognized that the Legislature has expressly restricted deduction under section 80G only for donations to Swachh Bharat Kosh and Clean Ganga Fund when included as CSR expenditure, and 'no prohibition or restriction' is placed on other CSR donations eligible under section 80G.The Court applied the legal maxim 'Expressio Unius Est Exclusio Alterius' to infer that since only specific exceptions are mentioned in section 80G, other CSR donations to registered institutions under section 80G(5)(vi) are eligible for deduction under section 80G.Explanation 2 to section 37(1) of the Act mandates that CSR expenditure is 'not a business expenditure and cannot be allowed as such,' and if the assessee 'suo-moto disallowed the same by adding it back to the P&L account,' then deduction under section 80G cannot be denied.The Court found the Assessing Officer's allowance of deduction under section 80G for eligible CSR donations to be a 'plausible view' and consistent with Tribunal precedents, and held that the Commissioner's revision under section 263 was 'bad in law' and quashed it.The Court directed the Assessing Officer to verify that the assessee has not claimed CSR expenditure as business expenditure and has added back such amounts to profit and loss account before allowing deduction under section 80G. RATIONALE: The Court relied on the statutory framework of the Income Tax Act, 1961, particularly sections 80G, 37(1) Explanation 2, and the Companies Act, 2013 section 135, to analyze the eligibility of CSR expenditure for deduction.The Court followed binding precedents from coordinate benches of the Tribunal, including the Kolkata Bench's detailed interpretation of section 80G, which clarified that Parliament intended only specific restrictions on CSR donations to Swachh Bharat Kosh and Clean Ganga Fund, leaving other CSR donations eligible for deduction.The Court applied the interpretative principle of 'Expressio Unius Est Exclusio Alterius' to conclude that the absence of express prohibition for other CSR donations implies their eligibility for deduction under section 80G.The Court emphasized that Explanation 2 to section 37(1) excludes CSR expenditure from business expenditure, and if the assessee complies by disallowing such expenditure in business income computation, deduction under section 80G for eligible donations should be allowed.The Court rejected the Commissioner's invocation of revisional jurisdiction under section 263 on the ground that the Assessing Officer's order was not erroneous or prejudicial to revenue, thus preserving the principle that revision cannot be invoked without jurisdictional facts.